On a crisp November morning, the atmosphere in the Frankfurt conference room is becoming heated. One of the speakers, in front of a large crowd gathered to hear the debate on the role of the European Central Bank in the crisis engulfing European sovereign bond markets, appeals for moderation inside the packed room and beyond. "The mood in Europe is getting less and less amiable and more and more confrontational, and the risk is that this poisons the European debate."
The main speakers have been Antonio Sáinz de Vicuña, general counsel of the ECB, and professor Markus Kerber, from the Technical University of Berlin. Kerber has accused the ECB of over-stepping the treaty limits imposed on it to prevent bailouts of sovereign states by undertaking large-scale purchases of troubled eurozone government bonds. The Securities Markets Programme (SMP) has been running since May 2010, when the ECB began buying Greek government bonds. It has been expanded rapidly in recent weeks in an effort to bring down yields on Spanish and Italian government bonds ahead of auctions of new securities to a shrinking and risk-averse investor base.
Sáinz de Vicuña refers his accuser to former ECB president Jean-Claude Trichet’s speech in May 2010, setting out the case that emerging and dramatic divergences in sovereign spreads were impeding the even transmission of ECB monetary policy across the eurozone. This provided then, and still provides today – so the ECB general counsel claims – legal justification for limited and temporary ECB buying to correct dysfunction in the secondary market for eurozone government bonds.
Kerber fires back that a programme running for 18 months seems to be testing the definitions of temporary and of limited. By the end of last month, analysts suggest that the ECB was holding on the eurosystem balance sheet over €200 billion of mainly Italian, Spanish and Greek government bonds, while also having advanced even larger sums of liquidity to banks from those countries supplying government bonds to the ECB as collateral at more modest haircuts than might be demanded by other counterparts, such as the London Clearing House.
Kerber also suggests that far from failing, bond markets are functioning perfectly well, thank you, in demanding high spreads to fund spendthrift sovereigns. And in any case, by making its purchases of Italian government bonds conditional on the swift implementation of fiscal reform – a link made explicit in an August letter from Trichet and his successor at the ECB, Mario Draghi, to the then prime minister of Italy, Silvio Berlusconi – the ECB has stepped into the forbidden territory of national budgetary policy.
This is not, says Kerber, the economic and monetary union that Germany signed up to.
The debate is hosted by Open Europe, a think-tank whose chief economist Raoul Ruparel has suggested that the mounting risks on the ECB’s balance sheet – up to €590 billion of exposure to Portugal, Italy, Ireland, Greece and Spain by early November – have not been properly appreciated. These exposures raise a serious risk, Ruparel argues, of losses in the event of sovereign haircuts of a magnitude "that would effectively leave the ECB insolvent and in need of recapitalization".
Amid such wild-sounding notions that the ECB’s balance sheet is so full of rotten assets that it might itself be insolvent, it’s hardly surprising that temperatures are rising on this cool autumn Friday.
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"By continuously purchasing government bonds of doubtful credit standing, the ECB has gone beyond its mandate. There is no alternative but to judicially review the ECB’s illegal actions"
Derk-Jan Eppink, MEP |
Staging a public debate between Sáinz de Vicuña and Kerber is all the more remarkable given that Kerber is taking his case against the ECB to the General Court in Luxembourg.
In the days after the debate in Frankfurt, Derk-Jan Eppink, a member of the European Parliament, joined Kerber in his legal action, claiming that: "By continuously purchasing government bonds of doubtful credit standing, the ECB has gone beyond its mandate. From my perspective, there is no alternative but to judicially review the ECB’s illegal actions."
Observers of the edgy arguments between Kerber and Sáinz de Vicuña, while trying to keep their own heads cool, might have reflected on this: although the two men appear to be adversaries in the great debate over the role of the ECB as a lender of last resort to eurozone governments, these two agree much more than they differ.
They are essentially on the same side and represent, in fact, merely two different wings of the same faction in a wider debate. This faction opposes a much larger role for the ECB in bailing out European governments. Kerber expresses outrage at what the ECB has already done. Public comments from ECB senior officials show their own reluctance to do much more.
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New ECB chief Mario Draghi finds himself stuck between a rock and a hard place |
Draghi, in his first press conference as president of the ECB last month, rounded on a questioner who dared to ask if he was prepared to commit the ECB to doing whatever might be necessary, including becoming a lender of last resort to governments, to keep the euro area in one piece. "I have a question for you," Draghi shot back. "What makes you think that the ECB becoming the lender of last resort for governments is what is needed to keep the euro area together? No, I do not think that this is really within the remit of the ECB. The remit of the ECB is maintaining price stability over the medium term."
